Published: 07/30/2018

The Hollywood version of trading, where huge sums of money are made effortlessly by smiling traders in a matter of seconds, can often seem alien to anyone who trades for real.

It’s also changed structurally too, with trading now making a huge impact online. It can be done from home, with the same results the Wall Street guys get being available to the guy sitting in his living room in his jeans.

The ups n’ downs

One aspect that can prove to be especially traumatic is the ‘rollercoaster’ nature of trading.

This is true for home traders as well as the professionals on the exchanges. The psychological aspect of trading, where your brain has to deal with losing as well as winning, often within a matter of seconds, is the hardest part to get right.

Knowing how to manage your trading psychology and becoming a winning trader is vital. If you can’t take the pressure, you won’t get far. And this is true no matter what your trading strategies are.

Your first step in gaining a trading mindset involves you, and mastering your own emotions. Once you step beyond yourself a little and look at trading objectively, you’ll have a better chance of surviving … and thriving.

Do some deep research into the markets

The markets (and this includes all trading contexts) are fascinating things. If you spend time researching industries and companies within them you will start to understand the context of things. You’ll also be better placed to manage the rollercoaster.

For example, if you know things are bad in a certain company, you’ll be confident about buying and selling.

This should allow you to think more sensibly about markets and trades, and eventually come up with a trading plan. This is where you work out and articulate how you will act and what you will think when you trade.

A good trading plan allows you to work out what your expectations are, what you are like personality-wise as a forex trader, and what to avoid. Knowing the markets and currencies through deep research is a great way to build a foundation for a good trading plan.

Do some research into successful traders too

Knowing how they work can only give you full and deep insights into the best way to trade. Pretty soon, you’ll understand the objectivity involved in solid trading. Many successful traders treat what they do like running a business.

They don’t let emotions get involved, ever.

The aim is still to make money, but to manage risk at the same time. Studying successful traders will help your own trading in a huge way. You can really benefit from someone who has ‘made it’.

Intraday trading psychology

Day trading (or intraday trading) is tough.

It is perhaps the one area where fear of loss can have the most devastating effect.

Everything happens on the day, whatever you trade, therefore the minutes and hours can be almost unbearably stressful. The trading psychology behind the life of successful day traders is quite simple though, and once you get the main principles down, you should be better equipped to deal with the roller coaster.

Losing money is OK

First up, remember that you are going to lose money. This is going to happen, and it cannot be avoided in the long term no matter what you do. There are factors outside of your control, and this means that you can prepare as much as you like, something will still go wrong.

Keeping that in mind, remember also that this doesn’t have to be a bad thing. If you lose money, so be it. The nature of intraday trading is that things move very fast. If you actually expect to lose some of the time, but make larger winning trades when you do win compared to when you lose, then you are making progress and profit.

Remember that business analogy?

If you win, say 60% of your trades, you’re doing well. And because you’re often making big and small trades, your big trades will also come up trumps too. Over time, and with your business mindset, you’ll see that ‘profit and loss’ are perfectly natural partners.

The ‘afford to lose’ principle

This is one of the principles that are part of true trading success.

Everyday, no matter which mood you happen to be in, or what’s happening in your life, you should only ever trade sums you can afford to lose. Obviously, no one can really afford to lose money, but if you have a certain percentage of your money that you are prepared to lose in the pursuit of large gains, then you should feel better as the day moves on.

Only using that certain percentage is vital.

Stepping over the line and trading more than you can comfortably afford to lose will simply make you feel more stressed and then this will force your emotions into the driving seat. You’ll make bad decisions, and they can become catastrophic. This applies to all trades, whether on the foreign exchange (forex) or traditional stock trading.

You will feel better if you know the world isn’t going to end if a bad trade happens. This is again all about staying objective and maintaining your business mentality.

Loss Limit

If you aren’t including the correct use of loss limits in your trading psychology you’re facing real problems. It’s important that you focus on making sure that your loss limit is sensible, and one that keeps you able to manage your financial situation effectively.

Most successful traders set a loss limit at around the 7-8% level. This keeps them both afloat and ready to fight another day. It’s a vital part of money management.

This is a crucial principle to make clear.

Everyone knows it gets rough, and you can’t just ‘win’ because of luck, or even your skills. Sitting back and cutting your losses is actually part of a successful trader mindset. Ignoring this makes no sense.

Set a sensible loss limit and leave it there. Then get on with your trading. This way, no matter what happens, you’re not going to lose the farm even if you have a bad day.

The benefits of technical analysis

By knowing what the markets are like on a daily basis, point for point, and seeing trends over time, you are in a much better position than the vast majority of traders out there. While some traders are flying by the seat of their pants and hoping for the best, you’re picking stocks that you know have some value and clear prospects.

Technical analysis takes time though, and this is something that you need to be aware of. It will help your trading mindset if you’re able to put in the hours and understand technical analysis at a competent level. You don’t have to be a Soros, but you do need to know the basics.

Trust us, having an understanding of technical analysis and being able to apply it to your trading on a daily basis will make you feel less stressed and more able to handle your emotions.

Some key traps facing traders

The following areas are the biggest ‘traps’ a trader can face as their career progresses. Take a look at them and bear them in mind as you work to master your emotions.

Fear of missing out (or FOMO). A common problem with inexperienced traders, and perhaps especially new day traders. This is where you see some traders making a big win on a stock or option, and you jump in. You’ve jumped in at the wrong time though, and you end up making a big loss. This can all be avoided if you’ve followed your own rules, and focused on making informed decisions. The FOMO effect can often lead to big losses. Beware of that.

Pace yourself. If you’re doing really well one month and you’re taking a decent amount of money, don’t make the classic mistake of doubling trade amounts in the second month. Graduate your investments, always. This is the best way to build up a business mentality, and to protect your finances. Markets are notoriously volatile, don’t let your finances be the same. Always raise investment levels after careful consideration, and incrementally.

Cool down after a trade. If you have a great trade, relax and read the newspaper. If you have a bad trade, relax and read the newspaper. The best way to let emotions take over your strategy is to keep piling into new trades. This is to be avoided. Take it easy, and focus on each trade as being an individual matter, not an extension of the previous one.

The ‘good day’ trap is our last one. This is where you have an exceptional run of good trades and it feels like everything is going rosy. If you’re lucky (and you’ve worked hard to research and analyse) you will see that continuing perhaps right to the end of the day. You may not. Whatever happens, don’t think a run of good trades means anything. There will always be things that are out of your control. Play each trade ‘as it lays’, and focus on making an overall profit. If this means backing off, that’s what you do.

The psychology of trading is not as complex as it sounds. Focus on running your trading as a business, and bear in mind that you should always focus on having a clear and sensible stop loss amount, and you should be able to make it a lucrative career.

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The My Trading Skills Community is a social network, charting package and information hub for traders. Access to the Community is free for active students taking a paid for course or via a monthly subscription for those that are not.